• Table of Contents
    • Abstract
    • Keywords
    • Article
      • The Phillips curve and inflation bias
      • Overtaxation of capital and liquidity
      • Relation with game theoretic concepts
      • Solving the time inconsistency problem
      • Analysing what happens when the time inconsistency problem cannot be solved
    • See Also
    • Bibliography
    • How to cite this article

time consistency of monetary and fiscal policy

Paul Klein
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
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Abstract

Why do even benevolent policymakers frequently break their promises? Kydland and Prescott (1977) discovered that, when outcomes depend on expectations, rational policy choices typically depend on whether (a) the policymaker takes into account the constraint that the expected policy is the actual policy or (b) she takes expectations as given. A government that commits itself to a policy takes this constraint into account, a government that acts at its discretion does not. Since the commitment policy leads to a better outcome, there is the temptation to announce it and then to abandon this policy. This is the time inconsistency problem.
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Keywords

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Article

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How to cite this article

Klein, Paul. "time consistency of monetary and fiscal policy." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 21 October 2014 <http://www.dictionaryofeconomics.com/article?id=pde2008_T000219> doi:10.1057/9780230226203.1705

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